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LOCK > SEC Filings for LOCK > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for LIFELOCK, INC.

Form 10-Q for LIFELOCK, INC.


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "estimate," "expect," "intend," "may," "might," "plan," "project," "will," "would," "should," "could," "can," "predict," "potential," "continue," "objective," or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of proactive identity theft protection services for consumers and identity risk assessment and fraud protection services for enterprises. We protect our members by constantly monitoring identity-related events, such as new account openings and credit-related applications. If we detect that a member's personally identifiable information is being used, we offer notifications and alerts, including proactive, near real-time, actionable alerts, that provide our members peace of mind that we are monitoring use of their identity and allow our members to confirm valid or unauthorized identity use. If a member confirms that the use of his or her identity is unauthorized, we can proactively take actions designed to protect the member's identity. We also provide remediation services to our members in the event that an identity theft actually occurs. We protect our enterprise customers by delivering on-demand identity risk and authentication information about consumers. Our enterprise customers utilize this information in real time to make decisions about opening or modifying accounts and providing products, services, or credit to consumers to reduce financial losses from identity fraud.

The foundation of our differentiated services is the LifeLock ecosystem. This ecosystem combines large data repositories of personally identifiable information and consumer transactions, proprietary predictive analytics, and a highly scalable technology platform. Our members and enterprise customers enhance our ecosystem by continually contributing to the identity and transaction data in our repositories. We apply predictive analytics to the data in our repositories to provide our members and enterprise customers actionable intelligence that helps protect against identity theft and identity fraud. As a result of our combination of scale, reach, and technology, we believe that we have the most proactive and comprehensive identity theft protection services available, as well as the most recognized brand in the identity theft protection services industry.

On March 14, 2012, we acquired ID Analytics, a provider of enterprise identity risk assessment and fraud protection services and a strategic technology partner of ours since 2009, for a total purchase price of $186.0 million. Our acquisition of ID Analytics marked our entry into the enterprise market and enhanced the LifeLock ecosystem by expanding our data repositories and providing direct ownership of certain intellectual property related to our services. We began recognizing revenue from our enterprise customers immediately following the closing of our acquisition of ID Analytics on March 14, 2012.

We derive the substantial majority of our revenue from member subscription fees. We also derive revenue from transaction fees from our enterprise customers.

We offer our consumer identity theft protection services on a monthly or annual, automatically renewing subscription basis. As of June 30, 2013, approximately 60% of our members subscribed to our consumer services on an annual basis. We currently offer our consumer services under our basic LifeLock, LifeLock Command Center, and premium LifeLock Ultimate services, with retail list prices of $10, $15, and $25 per month and $110, $165, and $275 per year, respectively. We recently released our LifeLock Junior service, which monitors personal information with proactive protection features designed specifically for children, with a retail list price of $6 per month and $65 per year. Our average revenue per member is lower than our retail list prices due to wholesale or bulk pricing that we offer to strategic partners in our embedded product, employee benefits, and breach distribution channels to drive our membership growth. In our embedded product channel, our strategic partners embed our consumer services into their products and services and pay us on behalf of their customers; in our employee benefit channel, our strategic partners offer our consumer services as a voluntary benefit as part of their employee benefit enrollment process; and in our breach channel, enterprises that have experienced a data breach pay us a fee to provide


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our services to the victims of the data breach. We also offer special discounts and promotions from time to time to incentivize prospective members to enroll in one of our consumer services. Our members pay us the full subscription fee at the beginning of each subscription period, in most cases by authorizing us to directly charge their credit or debit cards. We initially record the subscription fee as deferred revenue and then recognize it ratably on a daily basis over the subscription period. The prepaid subscription fees enhance our visibility of revenue and allow us to collect cash prior to paying our fulfillment partners.

Our enterprise customers pay us based on their monthly volume of transactions with us, with approximately half of them committed to monthly transaction minimums. We recognize revenue at the end of each month based on transaction volume for that month and bill our enterprise customers at the conclusion of each month.

We have historically invested aggressively in new member acquisition and expect to continue to do so for the foreseeable future. Our largest operating expense is advertising for member acquisition, which we record as a sales and marketing expense. This is comprised of radio, television, and print advertisements; direct mail campaigns; online display advertising; paid search and search-engine optimization; third-party endorsements; and education programs. We also pay internal and external sale commissions, which we record as a sales and marketing expense.

Since our founding in April 2005, we have experienced 33 consecutive quarters of sequential growth in both total revenue and cumulative ending members primarily due to the success of our marketing efforts, the introduction of premium services, and our strong member retention rate. In general, increases in revenue and cumulative ending members occur during and after periods of significant and effective direct retail marketing efforts.

For the three-month period ended June 30, 2013, we recorded revenue of $89.5 million, an increase of 32% from the three-month period ended June 30, 2012. Revenue in our consumer segment was $82.6 million for the three-month period ended June 30, 2013, a 34% increase from $61.6 million for the three-month period ended June 30, 2012. We generated a net loss from operations of $2.2 million and a net loss of $2.1 million for the three-month period ended June 30, 2013. For the six-month period ended June 30, 2013, we recorded revenue of $171.6 million, an increase of 37% from the six-month period ended June 30, 2012, which only included enterprise revenue subsequent to our acquisition of ID Analytics. Revenue in our consumer segment was $157.7 million for the six-month period ended June 30, 2013, a 33% increase from $118.3 million for the six-month period ended June 30, 2012. We generated a net loss from operations of $6.1 million and a net loss of $6.2 million for the six-month period ended June 30, 2013.

Our Business Model

In our consumer business, we evaluate the lifetime value of a member relationship over its anticipated lifecycle. While we generally incur member acquisition costs in advance of or at the time of the acquisition of the member, we recognize revenue ratably over the subscription period. As a result, a member relationship is not profitable at the beginning of the subscription period even though it is likely to have value to us over the lifetime of the member relationship.

When a member's subscription automatically renews in each successive period, the relative value of that member increases because we do not incur significant incremental acquisition costs. We also benefit from decreasing fulfillment and member support costs related to that member, as well as economies of scale in our capital and operating and other support expenditures.

In our enterprise business, the majority of our costs relate to personnel primarily responsible for data analytics, data management, software development, sales and operations, and various support functions. We incur minimal third-party data expenses, as our enterprise customers typically provide us with their customer transaction data as part of our service. New customer acquisition is often a lengthy process requiring significant investment in the sales team, including costs related to detailed retrospective data analysis to demonstrate the return on investment to prospective customers had our services been deployed over a specific period of time. Since most of the expenses in our enterprise business are fixed in nature, as we add new enterprise customers, there are typically modest incremental costs resulting in additional economies of scale.

Key Metrics

We regularly review a number of operating and financial metrics to evaluate our business, determine the allocation of our resources, measure the effectiveness of our sales and marketing efforts, make corporate strategy decisions, and assess operational efficiencies.


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Key Operating Metrics

The following table summarizes our key operating metrics for the three- and
six-month periods ended June 30:



                                                     Three Months                              Six Months
                                                    Ended June 30,                           Ended June 30,
                                               2013                 2012                 2013               2012
                                                    (in thousands, except percentages and per member data)
                                                                         (Unaudited)
Cumulative ending members                         2,760                2,282                 2,760            2,282
Gross new members                                   230                  169                   480              377
Member retention rate                              87.4 %               85.4 %                87.4 %           85.4 %
Average cost of acquisition per member     $        175         $        172         $         165        $     157
Monthly average revenue per member         $      10.18         $       9.14         $       10.00        $    9.00
Enterprise transactions                          48,325               55,710               106,808          105,479

Cumulative ending members. We calculate cumulative ending members as the total number of members at the end of the relevant period. Most of our members are paying subscribers who have enrolled in our consumer services directly with us on a monthly or annual basis. A small percentage of our members receive our consumer services through third-party enterprises that pay us directly, often as a result of a breach within the enterprise or by embedding our service within a broader third-party offering. We monitor cumulative ending members because it provides an indication of the revenue and expenses that we expect to recognize in the future.

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As of June 30, 2013, we had approximately 2.8 million cumulative ending members, an increase of 21% from June 30, 2012. This increase was driven by several factors, including the success of our marketing campaigns, increased awareness of breaches, media coverage of identity theft, and our continued retention improvements.

Gross new members. We calculate gross new members as the total number of new members who enroll in one of our consumer services during the relevant period. Many factors may affect the volume of gross new members in each period, including the effectiveness of our marketing campaigns, the timing of our marketing programs, the effectiveness of our strategic partnerships, and the general level of identity theft coverage in the media. We monitor gross new members because it provides an indication of the revenue and expenses that we expect to recognize in the future. For the three-month period ended June 30, 2013, we enrolled 230,000 gross new members, up from 169,000 for the three-month period ended June 30, 2012. For the six-month period ended June 30, 2013, we enrolled 480,000 gross new members, up from 377,000 for the six-month period ended June 30, 2012. This increase was driven by the success of our marketing campaigns, the continued success of our LifeLock Ultimate service, which accounted for more than 40% our gross new members during the three- and six-month periods ended June 30, 2013, and increased awareness of breaches and identity theft.

Member retention rate. We define member retention rate as the percentage of members on the last day of the prior year who remain members on the last day of the current year, or for quarterly presentations, the percentage of members on the last day of the comparable quarterly period in the prior year who remain members on the last day of the current quarterly period. A number of factors may increase our member retention rate, including increases in the number of members enrolled on an annual subscription, increases in the number of alerts a member receives, increases in the number of members enrolled in our premium services, and increases in the number of members enrolled through strategic partners with which the member has a strong association. Conversely, factors reducing our member retention rate may include increases in the number of members enrolled on a monthly subscription, increases in the number of members enrolled in our basic LifeLock service, and the end of programs in our embedded product and breach channels. We monitor our member retention rate because it provides a measure of member satisfaction and the revenue that we expect to recognize in the future.


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As of June 30, 2013, our member retention rate was 87.4%, an increase of 2.0% points from June 30, 2012. This continued improvement was due to a variety of factors, including consumer awareness, media coverage of identity theft, and our focus on customer service and operational efficiencies.

Average cost of acquisition per member. We calculate average cost of acquisition per member as our sales and marketing expense for our consumer segment during the relevant period divided by our gross new members for the period. A number of factors may influence this metric, including shifts in the mix of our media spend. For example, when we engage in marketing efforts to build our brand, our cost of acquisition per member increases in the short term with the expectation that it will decrease over the long term. In addition, when we introduce new partnerships in our embedded product channel, such as when we launched our partnership with AOL in the fourth quarter of 2011, our average cost of acquisition per member decreases due to the volume of members that enroll in our consumer services in a relatively short period of time. We monitor average cost of acquisition per member to evaluate the efficiency of our marketing programs in acquiring new members. For the three-month period ended June 30, 2013, our average cost of acquisition per member was $175, up from $172 for the three-month period ended June 30, 2012. For the six-month period ended June 30, 2013, our average cost of acquisition per member was $165, up from $157 for the six-month period ended June 30, 2012. Although our average cost of acquisition per member increased period-over-period, the continued improvements in our member retention rate and the increasing monthly average revenue per member, primarily from the continued penetration of our LifeLock Ultimate service, results in a higher lifetime value of a member relationship which enables us to absorb a higher average cost of acquisition per member.

Monthly average revenue per member. We calculate monthly average revenue per member as our consumer revenue during the relevant period divided by the average number of cumulative ending members during the relevant period (determined by taking the average of the cumulative ending members at the beginning of the relevant period and the cumulative ending members at the end of each month in the relevant period), divided by the number of months in the relevant period. A number of factors may influence this metric, including whether a member enrolls in one of our premium services; whether we offer the member any promotional discounts upon enrollment; the distribution channel through which we acquire the member, as we offer wholesale pricing in our embedded product, employee benefit, and breach channels; and whether a new member subscribes on a monthly or annual basis, as members enrolling on an annual subscription receive a discount for paying for a year in advance. While our retail list prices have historically remained unchanged, our average revenue per member increased approximately 11% in the three- and six-month periods ended June 30, 2013 from the three- and six-month periods ended June 30, 2012. We monitor monthly average revenue per member because it is a strong indicator of revenue in our consumer business and of the performance of our premium services. The increase in our monthly average revenue per member resulted primarily from the continued success of our LifeLock Ultimate service, which accounted for more than 40% of our gross new members for the three- and six-month periods ended June 30, 2013.

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Our monthly average revenue per member for the three-month period ended June 30, 2013 was $10.18, an increase of 11% from the three-month period ended June 30, 2012. Our monthly average revenue per member for the six-month period ended June 30, 2013 was $10.00, an increase of 11% from the six-month period ended June 30, 2012.


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Enterprise transactions. We calculate enterprise transactions as the total number of enterprise transactions processed for either an identity risk or credit risk score during the relevant period. Our enterprise transactions are processed by ID Analytics, which we acquired on March 14, 2012. Accordingly, the enterprise transactions data for 2012 includes transactions processed by ID Analytics before the acquisition. Enterprise transactions have historically been higher in the fourth quarter as the level of credit applications and general consumer spending increases. We monitor the volume of enterprise transactions because it is a strong indicator of revenue in our enterprise business.

We processed 48.3 million enterprise transactions for the three-month period ended June 30, 2013, a decrease of 13% from the three-month period ended June 30, 2012. The decrease was primarily driven by a large telecommunications customer who had previously obtained scores for all their incoming subscribers through all channels such as wireless, landline, and bundled internet services. After process and technical modifications were made, the customer made the decision to stop obtaining scores for in-home service customers due to the fraud risk associated with these segments being lower than the wireless segment. Going forward, this customer will now only be obtaining scores for customers coming in from the mobile portion of their business where the fraud risk is much higher. Due to the low per transaction price for this customer, this change had an immaterial impact to our enterprise revenue for the quarter. We do not expect to experience a similar decrease with other existing telecommunication customers. In addition, we have seen a reduction in enterprise transactions as we gave notice of non-renewal to several customers in our consumer segment and we have allowed such contracts to lapse as a result. We expect the transaction volume to decrease as these enterprise customers churn over time. We do not expect this to have a material impact on our total revenue. We processed 106.8 million enterprise transactions for the six-month period ended June 30, 2013, an increase of 1% from the six-month period ended June 30, 2012.

Key Financial Metrics

The following table summarizes our key financial metrics for the three- and
six-month periods ended June 30:



                                     Three Months                Six Months
                                    Ended June 30,             Ended June 30,
                                   2013         2012         2013          2012
                                                  (in thousands)
           Consumer revenue      $ 82,574     $ 61,616     $ 157,667     $ 118,324
           Enterprise revenue       6,946        6,267        13,947         7,171

           Total revenue         $ 89,520     $ 67,883     $ 171,614     $ 125,495
           Adjusted net income   $  3,438     $  3,749     $   4,011     $   4,160
           Adjusted EBITDA       $  4,635     $  6,067     $   6,514     $   7,936
           Free cash flow        $ 18,424     $ 11,552     $  29,934     $  21,019

Adjusted Net Income

Adjusted net income is a non-GAAP financial measure that we calculate as net income (loss) excluding amortization of acquired intangible assets, change in fair value of warrant liabilities, change in fair value of embedded derivatives, share-based compensation, and income tax benefits resulting from the acquisition of ID Analytics. We have included adjusted net income in this Quarterly Report on Form 10-Q because it is a key measure used by us to understand and evaluate our core operating performance and trends. In particular, the exclusion of certain expenses in calculating adjusted net income can provide a useful measure for period-to-period comparisons of our core business.

Accordingly, we believe that adjusted net income provides useful information to investors and others in understanding and evaluating our operating results in the same manner as we do. We believe that it is useful to exclude amortization of acquired intangible assets, change in fair value of warrant liabilities, change in fair value of embedded derivatives, share-based compensation, and income tax benefits from our acquisition of ID Analytics from net income (loss) because (i) the amount of such non-cash expenses in any specific period may not directly correlate to the underlying operational performance of our business, and (ii) such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.

Our use of adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include the following:

although amortization of intangible assets is a non-cash charge, additional intangible assets may be acquired in the future and adjusted net income does not reflect cash capital expenditure requirements for new acquisitions;

adjusted net income does not reflect changes in, or cash requirements for, our working capital needs;

adjusted net income does not consider the potentially dilutive impact of share-based compensation;

adjusted net income does not reflect the income tax benefit from the release of the valuation allowance due to increased deferred tax liabilities resulting from our acquisition of ID Analytics; and


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other companies, including companies in our industry, may calculate adjusted net income or similarly titled measures differently, limiting their usefulness as a comparative measure.

Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including various cash flow metrics, net income (loss), and our other GAAP results. The following table presents a reconciliation of adjusted net income to net income (loss) for each of the periods indicated:

                                                      Three Months                   Six Months
                                                     Ended June 30,                Ended June 30,
                                                   2013           2012           2013          2012
                                                                    (in thousands)
Reconciliation of Net Income (Loss) to
Adjusted Net Income:
Net income (loss)                                $ (2,065 )     $ (6,898 )     $ (6,182 )    $  11,555
Amortization of acquired intangible assets          1,966          1,966          3,932          2,325
Change in fair value of warrant liabilities            -           7,836             -           2,941
Change in fair value of embedded derivative            -            (714 )           -            (714 )
Share-based compensation                            3,537          1,559          6,261          2,363
Tax benefit from acquisition                           -              -              -         (14,310 )

Adjusted net income                              $  3,438       $  3,749       $  4,011      $   4,160

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income . . .

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